On October 30, 2008, an en banc panel of the Federal Circuit upheld a ruling by the Board of Patent Appeals and Interferences that a business method developed by Bernard Bilski and Rand Warsaw for hedging risks in commodities trading is not patentable under the U.S. Patent Act, 35 U.S.C. § 101.

In the majority opinion, Chief Judge Michel explicitly rejects the “useful, concrete and tangible result” test the Federal Circuit had set forth in State Street in 1998.Relying on the Supreme Court opinions in Gottschalk v. Benson and Diamond v. Diehr, the court in Bilski states that in order to be eligible for a patent, a process must fulfill the “machine-or-transformation” test.According to this test, a process is patentable under 35 U.S.C. § 101 if “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

Patently-O explores the case with detailed commentary, including potential applications to biotechnology and life sciences, software claims, and tax strategies.Daniel Crowe, a patent litigator at Bryan Cave, states that it remains uncertain what will happen to the business-method patents that have been approved since 1998that might not hold up under the Bilski test. Randy Lipsitz, a patent specialist at Kramer Levin in New York predicts that the number of patent applications from the financial and software industries will decrease as a result of the decision.Steve Seidenberg of InsideCounsel believes that State Street’s many critics, who see business patents as opening the doors to patent trolls, low-quality patents, and excessive litigation costs will be pleased with the Bilski decision.

Applying the new test to Bilski’s claimed business method, the court found that a method for hedging risk is a fundamental principle, such as an abstract idea, law of nature, or mathematical relationship, which cannot receive patent protection.The Bilski court determined that only the specific application of a fundamental principle that has ties to a particular machine or that transforms an article into another state or thing can receive protection, and held that Bilski’s risk-hedging strategy does neither.

The majority establishes that the machine-or-transformation test does not simply ask whether or not the process contains physical steps.A process, for example, that only records bits on paper or a computer after every step or generates post-solution activity would be insufficient. Likewise, a process with physical steps not reciting a machine or not transforming an article would also fail under the test. Not all business methods are invalid per se as a result of Bilski, only those that cannot satisfy the test.

Circuit Judge Dyk filed a concurring opinion, and Circuit Judges Newman, Mayer, and Rader filed dissenting opinions. Judge Rader’s dissent observes that Bilski’s claim would almost certainly have failed under existing case law because his invention is merely an abstract idea.As discussed by Patently-O, the majority may have chosen to go further than Rader in order to avoid the preemption of fundamental principles.In the Wall Street Journal, Bradley Wright of Banner & Witcoff suggests that the majority may have decided in this way to reduce the possibility of reversal by the Supreme Court.

Judge Mayer in his dissent argues that the court did not go far enough in limiting business method patents, which he believes deter innovation and deprive people of what belongs more appropriately in the public domain. Mayer cites a JOLT article from 2007, noting “that both Japan and the Republic of Korea explicitly define an “invention” as the application of a law of nature, and argues that the United States should follow a similar approach to patentability. See Andrew A. Schwartz, The Patent Office Meets the Poison Pill: Why Legal Methods Cannot be Patented, 20 Harv. J. Law & Tech. 333, 357 (2007).”

The Federal Circuit acknowledges that the patentability of specific computer processes will require further elaboration in subsequent cases, suggesting that software will not be impacted in the same ways as business methods.

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[...] and applaud the outcome. PatentlyO.com explores the case with commentary. The Digest covered the In re Bilski decision back in October. Following Bilski, Judge Gajarsa applied the machine-or-transformation [...]